Social Security Levies and the Statute of Limitations

December 14, 2022 by 2 Comments

Les wrote a post on the Dean case last year in which the 11th Circuit made clear that an IRS levy on social security payments made prior to the expiration of the statute of limitations continued to capture those payments after the statute expired.  Shortly thereafter Les wrote a post on a Chief Counsel Advisory opinion explaining the distinction between continuous wage levies and levies on fixed assets.  The district court opinion in the case of Maehr v. Internal Revenue Serv. / United States, No. 22-CV-00830-PAB-NRN, 2022 WL 16834551 (D. Colo. Nov. 8, 2022) provides another opinion on the IRS ability to obtain social security payments for the life of the taxpayer unlimited by the collection statute of limitations in situations in which it levies on the social security payment prior to the expiration of the statute of limitations.  The Maehr case does not break new ground but does serve as a reminder of the power of the levy.  It also raises a couple of interesting points worth discussing.

Mr. Maehr is no stranger to the courts or to our blog.  I wrote about the 10th Circuit decision in his passport revocation.  Les wrote about 10th Circuit’s Maehr v Koskinen involved an IRS levy on a bank account that had received the taxpayer’s VA disability deposits.  Mr. Maehr appears to be a tax protestor with a litigation bent but with some legitimate concerns mixed in with non-legitimate ones.  See footnote 2 of the district court opinion for a list of all of his litigation against the IRS.  While his cases help us interpret tax procedure, it is unfortunate that this veteran suffers in his continuing fights with the IRS for himself, the IRS and the courts.  Today’s post concerns his latest loss.

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The years at issue in this case are 2003-2006.  By the time of this litigation, the IRS had written off the liabilities he owed for these years because the statute of limitations on collection had expired.  He argues that because of its expiration the IRS must release levies it filed prior to the expiration.

Citing to the Dean case linked above, the 10th Circuit acknowledges that the IRS must ordinarily stop collection when the statute of limitation on collection expires; however, it notes:

a levy made within the collections period on a fixed and determinable right to payment, which right includes payments to be made after the period of limitations expires, does not become unenforceable upon the termination of the period of limitations and will not be released unless the liability is satisfied. 26 C.F.R. § 301.6343-1(b)(ii). Thus, Mr. Maehr’s claims for prospective relief with respect to the levies also fail.

Describing the Dean case, the 10th Circuit states:

Having seized his entire benefit before the expiration of the collection limitations period, the IRS was not required to relinquish it after the period expired. See 26 C.F.R. § 301.6343-1(b)(1)(ii). Thus, the district court did not err in disregarding Dean’s mistaken legal conclusions regarding the continuing viability of the 2013 levy, or in concluding that the remaining allegations in his complaint failed to state a claim for unlawful collection action by IRS employees.

It then says simply that the same logic applies to Mr. Maehr’s case.  In rejecting his arguments based on the validity of the levy, it also points out that his action is barred by the Declaratory Judgment Act and the Anti-Injunction act.

While the IRS can manually levy the full amount of a social security benefit (subject to allowances for reasonable living expenses), situations in which the IRS levies on a taxpayer’s full social security liability outside the automated Federal Levy Program rather than just 15% are not common. A tax protestor like Mr. Maehr is far more likely to face this problem than a taxpayer working with the IRS to resolve the liability. The case demonstrates the power the IRS has but does not necessarily reflect a normative form of tax collection.

There are two additional points raised in the opinion that deserve mention.  The first involves the revocation of his passport.  In the current case the IRS makes clear that it notified the State Department that the revocation of his passport should end.  The IRS takes the position that the expiration of the statute of limitations on collection for the liabilities giving rise to the passport revocation results in a reversal of the revocation letter it sent to the State Department.  Mr. Maehr complains that he has not received a return of his passport.  The court advises him to take this up with the State Department as the IRS has done what it needs to do.  While it makes perfect sense that the IRS would pull back a passport revocation upon the expiration of the statute of limitations giving rise to the request for revocation, I had not previously seen this brought out in a case.

The second, and more concerning point, concerns hardship.  The court states:

Mr. Maehr also appears to ask for the following additional relief: a declaration that he has provided ample evidence of his current impoverished financial condition under 26 U.S.C. § 6342(a)(1)(D)3 and that the debt is uncollectable. He asserts that the assessment was made many years ago, and the IRS, despite the ongoing garnishment, will never satisfy the debt in Mr. Maehr’s lifetime, continuing to impoverish him for the rest of his life.

Mr. Maehr should have cited to IRC 6343 which the court notes in its footnote, but aside from noting that he cited to the wrong statutory provision, the court does nothing further with this allegation.  The information in the case does not provide a basis for determining if the social security levy, in fact, places Mr. Maehr into hardship status.  It’s easy to imagine that it would, but he is a veteran and its also possible that he has veteran’s benefits and other resources that would keep his income above hardship status. 

I know this will be hard for him, but Mr. Maehr should work with the IRS to demonstrate the hardship the levy on his social security benefits is creating.  If he can show that the levy places him in hardship status, the IRS should release the levy.  Once it releases the levy after the statute of limitations has expired, I don’t believe it can reissue the levy.  Hardship in this situation may serve as the magic bullet to end a post-statute of limitations levy.  This is an important issue not only for Mr. Maehr but for anyone finding themselves with this type of levy.  The National Taxpayer Advocate has written (starting on page 527) about this type of levy in her annual reports for those seeking more information.

Filed Under: Levy, Social Security

Tracing Social Security Payments          

September 26, 2022 by 1 Comment

Social security funds provide a safety net for recipients and generally receive protected status from creditors.  The case of In re Weber, 130 AFTR2d 2022-5161 (Bankr. M.D. Fla. 2022) examines what happens to social security payments when the taxpayer uses them to pay federal income taxes and then receives a refund partially based on the social security payments.  The bankruptcy court allowed Mr. Weber to shield the portion of his tax refund which represented the return of his social security payments citing to 42 USC 407.  The decision speaks to the power of the exemption of social security funds from private creditors.

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Mr. Weber filed a chapter 7 bankruptcy petition in February of 2022.  At issue is his 2021 income tax refund which the trustee seeks to claim as an asset for the benefit of the general unsecured creditors of the bankruptcy estate.  Mr. Weber argues that a substantial portion of the refund resulted from his decision to have money withheld from his monthly social security payments to pay federal taxes.  He overestimated what his federal tax obligation for 2021 would be for reasons not explained in the opinion.  Mr. Weber’s position is that just because he had a portion of his social security payment used to pay an anticipated federal tax liability did not change the character of the funds to such a degree that they lost the protection afforded to social security payments.

You might ask why Mr. Weber had any taxes withheld from his social security payments.  The opinion indicates that he had a part time job as an employee.  The income from that job in 2021 was only $378.00 per month.  Based on that level of income, he would not have triggered any of his social security payments to become taxable, and he could have used wage withholding from the job to cover any taxes from his employment.  The facts suggest that his decision to withhold from his social security in 2022 was unnecessary.  We are not given information about prior years when his wages could have been higher and could have come from work as an independent contractor rather than an employee.  Higher income could have triggered tax on a portion of his social security payments making the withholding of a portion of the payment logical.  If he worked as an independent contractor, he might have found it simpler to have some of this social security payments withheld than to make quarterly estimated tax payments.  We just don’t have enough information to evaluate his thought process in having the withholding.  We do know that he overwithheld from his social security payments and that a significant portion of his 2021 refund resulted specifically from that withholding.

The trustee argued that once Mr. Weber’s social security payment went to the IRS as withholding for payment of taxes it lost its character as a protected social security payment and transformed into simply a tax payment the refund of which the trustee could reach for the benefit of the estate.  The trustee’s position is supported by the decision of the bankruptcy court in In re Crutch, 565 B.R. 36 [119 AFTR 2d 2017-1428] (Bankr. E.D.N.Y. 2017).

The bankruptcy court in Mr. Weber’s case stated:

Under 42 U.S.C. § 407, social security benefits are not subject to execution, levy, attachment, garnishment, or other legal process, and no other provision of law may limit or modify the exemption from execution except by express reference to the statute.

It acknowledged the Crutch decision but cited to another bankruptcy court decision, In re Spolarich, 2009 WL 10267351 (Bankr. N.D. Ind. Sept. 30, 2009), which it found more persuasive.  The court in Spolarich found the protection for Social Security payments exceptionally expansive and only subject to modification by express statute.  It determined that when a social security recipient uses a portion of that payment for tax withholding, the individual’s consent to the use of those funds extends only to the payment of tax liabilities and not to the payment of other claims stating:

[B]y the clear language of 26 U.S.C. §§ 3402(p)(1), the election to withhold [funds from social security payments] benefits only the Internal Revenue Service, and does not constitute a general waiver of the protections of § 407(a) with respect to Social Security benefits vis-à-vis other entities.

The bankruptcy court in Mr. Weber’s case agreed with the analysis in Spolarich and allowed him to exempt that portion of his 2021 tax refund traceable to the withholding of his social security payments.

We have discussed tracing of payments exempt from IRS levy in several posts.  This post written by Les discusses the issue and links to earlier post which also discussed the character of a protected payment once moved to an unprotected source. The issue of tracing arises in many contexts.  While the language of the social security statute may be particularly strong, the analysis here may be useful in other settings.  The policy issue of when a protected payment loses its special status is one worth considering.  If the Weber court got it right should the language of 42 USC 407 serve as a model for other statutes in which taxpayers receive payments protected from levies?  Can Weber assist taxpayers trying to fend off a levy to their bank account find assistance from the approach here?

Filed Under: Bankruptcy, Social Security

Limitation on Offset When the Government Seeks to Collect Restitution

August 2, 2021 by 1 Comment

The case of United States v. Taylor, No. 2:06-cr-00658 (E.D. PA 2021) brings out a limitation on the right to offset when the Government is collecting on a court-ordered restitution amount.  Here, the Government, specifically the Department of Justice, gets its hand slapped for levying on the social security of a convicted criminal.  The levy here is the 15% on social security that regularly arises with respect to outstanding federal tax obligations.  There is no indication in the opinion that the IRS made a restitution based assessment in this case or any kind of assessment.  This appears to be a case involving the payment of the court ordered restitution payment and not a derivative liability stemming from the restitution order.  The court does not mention the IRS other than in relation to the crime committed by the petitioner.

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Ms. Taylor and others were convicted of conspiracy to defraud the IRS.  The federal district court that sentenced her and then ordered her to pay a restitution judgment of $3.3 million.  The court, however, failed to take into account her financial resources and the Third Circuit vacated the restitution order and remanded the case so that the district court could make an appropriate determination of her ability to pay as well as her culpability.

On remand, the court determined her ability to pay was $100 per year and noted that the government could come back to the court for an increase if her circumstances changed.  This happened in 2012.  Between 2012 and 2019 when Ms. Taylor became eligible for aged-based social security benefits, the government did not return to the court to seek an increase, although it did make a preliminary determination that she could pay $25 a month.

The restitution payments were listed with the Bureau of Fiscal Services as available for offset pursuant to the Treasury Offset Program (TOP) because they were delinquent federal debts.  When the social security payments began, TOP began offsetting 15% of her social security (about $235 a month) and applied the funds taken from her monthly social security check to her outstanding restitution obligation.  She continued to comply with the court order to pay $100 a year.

When Ms. Taylor initially brought the action complaining of the TOP offset, she did so pro se.  The district court appointed Peter Hardy, one of the top white collar criminal defense attorneys in Philadelphia who also taught as an adjunct professor at Villanova when I was there and has guest posted for us in the past (for example, see this terrific post on the crime fraud exception to the attorney client privilege).  Undoubtedly, Ms. Taylor benefited from his appointment.

The court provides some background on the TOP program which we have discussed previously here and here. 

Ms. Taylor argued that she was in compliance with the restitution order, making the TOP offset inappropriate.  She also argued that her restitution debt was not delinquent, meaning it was not one the government should refer to TOP.  The Government argued that the referral to TOP was appropriate because she had a large outstanding debt.  The court finds that the debt is not delinquent:

“[U]nlike a civil judgment, the restitution order is the product of a ‘specific and detailed [statutory] scheme addressing the issuance . . . of restitution orders arising out of criminal prosecutions.’” Id. at 1204 (quoting United States v. Wyss, 744 F.3d 1214, 1217 (10th Cir. 2014)). Section 3572(d) states that “[a] person sentenced to pay a fine or other monetary penalty, including restitution, shall make such payment immediately, unless, in the interest of justice, the court provides for payment on a date certain or in installments.” 18 U.S.C. § 3572(d)(1). This subsection provides that the full payment of restitution is not due immediately if a court establishes a payment plan for restitution. See Martinez, 812 F.3d at 1205. Thus, “a defendant subject to an installment-based restitution order need only make payments at the intervals and in the amounts specified by the order.” Id. Section 3572 also explicitly defines when a payment of restitution is delinquent or in default. See 18 U.S.C. § 3572(h)-(i). A “payment of restitution is delinquent if a payment is more than 30 days late.” Id. § 3572(h). A “payment of restitution is in default if a payment is delinquent for more than 90 days. Notwithstanding any installment schedule, when a fine or payment of restitution is in default, the entire amount of the fine or restitution is due within 30 days after notification of the default.” Id. § 3572(i). These provisions “would be unnecessary, even meaningless, if the total restitution amount were already owed in full under an installment-based restitution order.” Martinez, 812 F.3d at 1205. It is evident from the structure and language of § 3572 that under an installment-based restitution order, the restitution debt only becomes delinquent when a defendant’s installment payment is more than 30 days late.

The court tells the government that if it wants more from Ms. Taylor it needs to come back to the court and request more.  It cannot simply offset at a time when she has continued to comply with the court’s order.  The court orders the government to stop the offset and to return to her all the money taken through TOP.  Perhaps the government will come looking for her and seek to raise the amount she must pay from $100 a year to a larger number.  Because she became unemployed as a result of the pandemic, this might prove difficult.

It’s unclear if the conspiracy to defraud the IRS could turn into a tax assessment.  If the IRS made a tax assessment of the liability or some part of the liability, it could collect on the tax liability independent of the restitution order and through a tax assessment could potentially levy on her social security.  Ms. Taylor, as part of her defense to the taking of the social security funds, argued that the taking of these funds put her into a difficult financial situation.  If the IRS made a tax assessment, it could not levy, even through TOP, if doing so would create financial hardship as defined by IRC 6343(a)(1)(D).  Convicted tax criminals generally make difficult taxpayers from whom to collect.  Ms. Taylor appears to fit into that category.

Filed Under: Levy, Offsets, Restitution, Social Security, Wrongful levy

Levy on Social Security Benefits: IRS Taking Payments Beyond Ten Years of Assessment Still Timely

July 13, 2021 by 4 Comments

Dean v US involves a motion to dismiss a taxpayer’s suit alleging that the IRS recklessly disregarded the law by continuing to levy on a taxpayer’s Social Security payments beyond the ten year SOL on collections.  The magistrate concluded that the IRS’s actions were not improper and recommended that the case be dismissed. The district court approved the recommendation and Dean timely appealed to the 11th Circuit, which affirmed the district court.  The case nicely illustrates how the ten-year collection period does not prevent collection beyond the ten-year period when there is a timely levy relating to a fixed and determinable income stream.

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Dean owed over two million dollars for tax years 1997-2005. IRS assessed the liabilities in 2007; IRS recorded a notice of federal tax lien shortly thereafter. In 2013, IRS served a levy on Dean and the SSA for the unpaid tax. Following the levy, SSA began paying over all of the benefits slated for Dean to the IRS. I here note as a tangent that this differs from the federal payment levy program under 6331(h), which authorizes an automatic 15% levy on certain federal benefits, including social security. IRS is not precluded from issuing continuous manual levies, as it did here, where it could take all of the benefits, subject to exemptions that the taxpayer establishes as per 6334(a)(9).

In 2017, with the CSED expiring, IRS filed a certificate of release of federal tax lien stating that Dean had “satisfied the taxes,” that the lien was “released,” and authorized the proper IRS officer to “note the books to show the release of this lien.” IRS also abated the assessments.

Dean at this point believed that the levy on his social security benefits should have stopped. When it did not, he filed a complaint in federal court alleging that the levy was an unauthorized collection action and he sought over $64,000 in damages.

Unfortunately for Mr. Dean, as the magistrate noted, the argument does not “hold water” (allowing me gleefully to link to the great Joe Pesci and Marisa Tomei scene in My Cousin Vinny).

The regs under Section 6331 describe the relationship between a levy and fixed and determinable payments: “[A] levy extends only to property possessed and obligations which exist at the time of the levy.” 26 C.F.R. § 301.6331–1(a). “Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date.” Id. 

An obligation is fixed and determinable “[a]s long as the events which gave rise to the obligation have occurred and the amount of the obligation is capable of being determined in the future …. It is not necessary that the amount of the obligation be beyond dispute.” United States v. Antonio. 71A AFTR 2d 93-4578], *6 n. 2 (D. Haw. Sept. 24, 1991). Numerous cases establish that Social Security benefits are a fixed and determinable obligation of the SSA and are subject to one-time levies. 

As the lower court opinion discusses, the 2013 levy created a custodial relationship between IRS and the SSA and as such the benefits came into constructive possession of the IRS. The regs under Section 6343 also provide that “a levy on a fixed and determinable right to payment which right includes payments to be made after the period of limitations expires does not become unenforceable upon the expiration of the period of limitations and will not be released under this condition unless the liability is satisfied .” 26 C.F.R. § 301.6343-1(b)(1)(ii).

The Eleventh Circuit also helpfully explains the relationship between the levy and the benefits, directly refuting the claim that the collection occurred after the expiration of the SOL:

Instead, the IRS seized his entire Social Security benefit—that is, his “fixed and determinable right to payment” of his Social Security benefit in monthly installments—immediately upon issuing the notice of levy in June 2013. 26 C.F.R. § 301.6343-1(b)(1)(ii); see Phelps, 421 U.S. at 337. Having seized his entire benefit before the expiration of the collection limitations period, the IRS was not required to relinquish it after the period expired. See 26 C.F.R. § 301.6343-1(b)(1)(ii).

The lower court opinion also nicely discusses the lack of legal significance of the IRS’s abatement of the assessment and issuance of the release of federal tax lien. Both events did not change that Dean owed an underlying tax.  As to the abatement, taxpayers are liable for the tax regardless of whether there has been an assessment. While the release of the federal tax lien affects the IRS’s security interest, it did not release the levy and had no bearing on the underlying tax debt.

Filed Under: Collection Activity, Levy, Social Security, Statutes of Limitation

Catching Up with Designated Orders, 2-10 to 2-14-20

June 17, 2020 by Leave a Comment

In the past few months, there have been some developments that are, dare I say, more important than the Tax Court’s designated orders. As such, I’ve prioritized those. Now that I’ve finally found some time, I have written on designated orders for the past few months. Here is the first in a series of posts. 

This week, most of the others are in CDP cases. Below, I highlight two CDP cases, including one case (Chau) where I’d like to have seen the Court deal more squarely with the question of whether the taxpayer waived an issue for review by failing to raise it in the CDP hearing. Another case discusses the taxation of Social Security benefits received by non-residents. 

Other designated orders for this week included:

  • An order from Judge Carluzzo granting Respondent’s motion for summary judgment in a CDP case where Petitioner didn’t provide financial information during the CDP hearing.
  • Another order from Judge Carluzzo in a CDP lien case, granting summary judgment where Petitioner failed to participate in the CDP hearing.
  • An order from Judge Gustafson granting Respondent partial summary judgment on whether a purported conservation easement failed the perpetuity requirement under section 170(h)(5)(A).
  • An order from Judge Gale granting a motion for summary judgment in a CDP case, in addition to imposing a $500 fine for frivolous arguments under section 6673.
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Docket No. 24671-18L, Sneeds Farm, Inc. v. C.I.R. (Order Here)

In the Clinic, I always stress the need to conduct a searching financial analysis before considering any particular collection alternative. Only from there can we proceed to see which options are feasible, and from those, select among those options in light of our clients’ priorities, values, and interests. Sometimes, the financial information isn’t “good”, relative to what would qualify the taxpayer for an Offer in Compromise or affordable installment agreement. In those situations, we need to consider other options, including presenting non-financial hardship information to the IRS. Those are tricky cases, because we must convince an IRS official to exercise their discretion.  

This case before Judge Carluzzo seems to be one I never would have brought before the IRS—at least not without significant facts that demonstrated some sort of hardship beyond these raw numbers.

Respondent filed a motion for summary judgment against Petitioner in this CDP case. The taxpayer had a liability of about $110,000 and had proposed to Appeals an installment agreement of $5,000 per month. Not a terribly bad deal for the IRS; such an agreement should pay off the liability in just over two years.

Nevertheless, because the liability was so high, this taxpayer didn’t qualify for a streamlined installment agreement, where the payment can be spread over 72 months. See IRM 5.14.5, Streamlined, Guaranteed, and In-Business Trust Fund Installment Agreements. Thus, the taxpayer was relegated to a payment based upon its financial circumstances. Unfortunately, the taxpayer apparently owned property with a net value of over $5 million—more than enough to satisfy the outstanding liability. Appeals rejected the proposed IA and issued a Notice of Determination, because the taxpayer wouldn’t explore the idea of selling the property or using it as collateral to obtain financing.

Of course, that’s not the end of the story. Perhaps there would be good reasons to not sell the property, such as if the property (as might be the case here based on Petitioner’s name) might be the very “farm” that gives this business taxpayer its raison d’etre.  Perhaps the taxpayer couldn’t obtain financing to pay off the liability.

If those issues existed, they don’t appear to have been presented to Appeals, let alone to the Tax Court. And because it’s well established that the Tax Court may sustain Appeals’ decision to proceed with collections where the taxpayer has sufficient assets to fully pay the liability, Judge Carluzzo has no trouble granting summary judgment to Respondent.

Docket No. 13579-19SL, Chau v. C.I.R. (Order Here)

CDP Week continues with this order from Judge Panuthos on Respondent’s motion for summary judgment in this CDP lien case. All the liabilities at issue are joint liabilities of former spouses. While the case is captioned only in the name of the Petitioner-husband, Mr. Chau, Judge Panuthos clarifies that both spouses signed the Tax Court petition and the lien notices were issued for joint liabilities.  

This order interests me because it seems to remand the case back to Appeals to consider an issue not raised at the Appeals hearing: Petitioner-wife’s request for Innocent Spouse relief. The petition mentioned that Ms. Nguyen was attempting to file an innocent spouse claim. But the Court doesn’t make reference to this request appearing in the Appeals hearing or in the written correspondence to Collections or Appeals in conjunction with the CDP hearing.

This would seem to raise the specter of waiver; if a taxpayer fails to raise an issue in the CDP hearing, the Tax Court generally “does not have authority to consider section 6330(c)(2) issues that were not raised before the Appeals Office.” Giamelli v. Comm’r, 129 T.C. 107, 115 (2007). Judge Panuthos does note in the Order that Respondent did not respond to the Innocent Spouse issue raised in the petition; but the petition in response to the Notice of Determination isn’t the Appeals hearing. Of course, as we can’t review the underlying summary judgment motion, I cannot speculate on whether Respondent independently raised the waiver issue.

In any event, Judge Panuthos ends up denying the motion for summary judgment and remands the case to IRS Appeals for consideration of the Innocent Spouse claim. I think it would have been helpful to deal squarely with the waiver issue in this order, even though this is designated as a small case, and thus not appealable or precedential.

Taxation of SS for NRAs: Docket No. 6641-18, Thomas v. C.I.R. (Order Here)

Finally, a relatively uncomplicated order on the taxation of Social Security received by nonresident aliens. How might a nonresident alien be entitled to Social Security benefits in the first instance? In this instance, Petitioner is the survivor of her U.S. citizen husband, and was therefore entitled to receive Social Security survivor benefits.

The general rule for non-resident aliens (which I did not know before reading this order) is that 85% of Social Security benefits received are taxed at a 30% rate. I.R.C. §§ 861(a)(8); 871(a)(3). And because Social Security benefits are not effectively connected with U.S. sourced income, no itemized or other deductions may offset the taxation of these benefits.

Most taxpayers are unlikely to wind up before Tax Court regarding such a dispute, because the Social Security Administration must also withhold that 30% from Social Security payments to nonresidents. Indeed, Petitioner’s case is the only case that appears in the Orders Search function on the Tax Court’s website when restricting the search to “861(a)”. But, somehow, Petitioner filed a tax return and received a refund of the withholding payments, eventually catching the eye of the IRS.

Section 861 also isn’t the end of the inquiry for many taxpayers. Practitioners must consult the relevant income tax treaties when researching the taxation of nonresident aliens. In this case, the United States-Trinidad and Tobago Income Tax Convention of 1970 makes no special provision for Social Security payments. Thus, the general rules of sections 861 and 871 apply. Note that the IRS helpfully summarizes the various income tax treaties’ taxation of various forms of income in this document.

Filed Under: Collection Due Process, Social Security

Paying for but not Receiving Your Social Security Benefits – The Consequence of Filing Late

January 8, 2018 by 3 Comments

We have had many posts on the myriad of consequences of filing late tax returns. One we have not discussed results when a self-employed taxpayer files more than three years late. In that situation, the individual must still pay the self-employment tax; however, the individual receives no social security benefits as a result of those payments. As the economy drives more and more individuals into jobs in which they have independent contractor status, the importance of filing on time increases in order to preserve future benefits available to those who qualify for social security.

When a non-filer shows up, sometimes we triage their return for the year in which the refund statute of limitations will soon expire. If it appears that the taxpayer will receive a refund, a last minute push occurs to send that return in before the expiration of the statute of limitations which is generally three years from the due date of the return. If it appears that the taxpayer owes money, the same last minute push may not occur. Because filing the return before three years from the original due date could preserve for the individual the ability to get credit for self-employment earnings for purposes of calculating the amount of social security they will receive, or even whether they will qualify for social security, the practitioner who has the chance to file the return before three years from the due date of the original return should make every effort to do so.

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In order to receive social security benefits based on age, an individual must accumulate 40 quarters of earnings. To receive social security disability benefits, the individuals needs 32 quarters.   In 2017, an individual receives credit for a quarter of social security earnings if they have $1,300 of qualified earnings. Anyone earning more than $5,200 in 2017 will receive four quarters of credit – the most quarters it is possible to earn in a single year. In addition to meeting the number of quarters necessary to obtain benefits, an individual receives social security benefits based on the amount of their earnings. While the formula skews towards individuals at the lower end of the earnings spectrum by giving a higher return on those earnings in calculating the benefits, the more a person earns the higher their social security benefits.

Here are the directions from Social Security on how to calculate your projected benefit. You can find Column A and B here. I include this primarily to show how valuable the lower earnings are to someone compared to the earnings over $5,336 and how the benefit skews to provide the greatest assistance to those who will likely have the greatest need. 

Step 1: your earnings in Column B, but not more than the amount shown in Column A. If you have no earnings, enter “0.”

Step 2: Multiply the amounts in Column B by the index factors in Column C, and enter the results in Column D. This gives you your indexed earnings, or the estimated value of your earnings in current dollars.

Step 3: Choose from Column D the 35 years with the highest amounts. Add these amounts. $_________

Step 4: Divide the result from Step 3 by 420 (the number of months in 35 years). Round down to the next lowest dollar. This will give you your average indexed monthly earnings. $_________

Step 5:

  1. Multiply the first $885 in Step 4 by 90%. $_________
  2. Multiply the amount in Step 4 over $885, and less than or equal to $5,336, by 32%. $_________
  3. Multiply the amount in Step 4 over $5,336 by 15%. $_________

Step 6: Add a, b, and c from Step 5. Round down to the next lowest dollar. This is your estimated monthly retirement benefit at … your full retirement age. $_________

The aged based benefit is calculated based on the highest 35 years of earnings. Some of my earnings from the 1960s and 1970s when I worked summer jobs while going to school and a quarter of earnings could accumulate for $250 will not do much to push up my high 35 years of earnings, but these quarters did provide a benefit to me in reaching the 40 quarters because all of my earnings when working for the federal government involved no social security taxation and therefore no buildup of earnings or quarters. Federal employees hired starting in the mid-1980s do pay social security, but some state and local government employees may still be outside of the social security system from their primary earnings. Some of my clients have not yet earned enough quarters to receive any social security benefits. Making sure that they understand the importance of earning enough quarters and the link between filing their tax return and earning quarters is something we try to impart.

What can you do if your client has failed to file their return within the normal time period for having their earnings count toward social security? Several exceptions apply to individuals in these circumstances; however, the exceptions are narrow:

After the time limit has passed, earnings records can only be revised under the conditions described below and in §1425:

1. To correct an entry established through fraud;

2. To correct a mechanical, clerical, or other obvious error;

3. To correct errors in crediting earnings to the wrong person or to the wrong period;

4. To transfer items to or from the Railroad Retirement Board (if reported to the wrong agency), or to add railroad earnings to Social Security earnings records when the law permits;

5. To add wages paid in a period by an employer who made no report of any wages paid to the worker in that period, or if the employer is increasing the originally reported amount for the period;

6. To add or remove wages in accordance with a wage report filed by the employer with IRS; or, if a State or local governmental employer, with SSA if the report is filed within the time limitation specified for assessment, refund, or credit under a State’s coverage agreement;

7. To add self-employment income in a taxable year if an individual or the individual’s survivor establishes that:

(1) A self-employment tax return for that year was filed before the time limit ran out; and

(2) Either no self-employment income for that year has been recorded in the individual’s earnings record, or the recorded self-employment income for that year is less than the amount reported on the self-employment tax return; or

8. To add self-employment income for any taxable year up to the amount of earnings that were wrongly recorded as wages and later deleted. This can be done only if a tax return reporting such self-employment income is filed within three years, three months, and 15 days after the taxable year in which the earnings wrongly recorded as wages were deleted. The self-employment income must:

(1) Be for the same taxable year as the year in which the wages were removed; and

(2) Have already been included on the individual’s Social Security record.

9. Prior to the expiration of the time limit the worker or the worker’s survivor has:

(1) Applied for benefits and stated that the earnings for a year(s) were incorrect; or

(2) Requested a revision of his or her earnings record for a year(s).

The time limit can also be extended if an investigation was in progress. Because of the manner in which social security benefits work, it may not be the taxpayer who wants or needs to correct the social security records. It could be a spouse or a child or someone else who can obtain benefits derivatively from the individual with the earnings.

Some sources for correcting the social security statement can be found here, here and here.

 

 

 

 

Filed Under: Return, Social Security

Promoting, Not Discouraging, Tax Compliance

October 31, 2014 by 4 Comments

Imagine you are Jane or Michael, a 14 year old who just entered the work force for the first time. In 2014 you earn $1,000 babysitting for your neighbor or cutting the grass.  You are proud of your earnings and newfound financial independence.  Like most of your friends you open a bank account and you decide to start saving your earnings for college, or maybe law school, or even retirement.

While thinking about your earnings and plans to save, you research the tax aspects of your employment as well as aspects of retirement planning, including Social Security benefits. At first after going to the library and checking out books on the tax law, you are surprised to learn that your self-employment earnings are subject to self-employment tax, but you are somewhat consoled when you read on the IRS website that “[y]our payment of these taxes contributes to your coverage under the Social Security system.”  However, while researching Social Security, you subsequently learn that you need 40 quarters of Social Security credits to qualify and that you must earn $1,200 in 2014 to qualify for one quarter of credit.  You are disappointed when you realize that you did not reach this level of earnings in 2014 but you vow to earn a little more in 2015 so you can start building credit for Social Security.

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The next night at the dinner table your family is talking tax policy and the self-employment tax comes up. Your pesky older brother rails against his landscaping job because they want to treat him as an independent contractor rather than an employee.  He complains that even though independent contractors seem to have a great advantage because they do not pay Social Security tax if they earn less than $400, he still wants to be an employee taxed on the first dollar.

This makes you wonder why independent contractors get to pass on self-employment taxes up to $400 of earnings and how this will impact your $1,000 earnings. After some research you learn that Congress initially did not make self-employed individuals pay self-employment tax if their earnings from self-employment would not allow them to get credit for a quarter of self-employment earnings; however, in 1978 Congress indexed the earnings necessary to receive one quarter of credit to inflation but it did not index the starting point for self-employment taxes.  So, you must pay self-employment tax on your earnings of $1,000 (about $150) but you get no, zero, nada credit from Social Security for this payment.

Thousands of teenagers similar to Jane and Michael (perhaps tens of thousands), as well as other very low-income earners, face this each year in the Untied States. These individuals, after carefully doing their research, realize that they must pay tax for something billed as insurance and for which they will receive no benefit.  Many of the people faced with this situation are just entering the workforce and many may not have even reached the age of majority, making this a tax on the unrepresented.  The dilemma facing the Janes and Michaels is whether they should pay this tax and be good citizens as they enter the work force because Congress mandated that they pay it.  Should they stand up and rail against the system Congress created or should they quietly let the matter slip because in many instances the IRS has not received a Form 1099 or other indication of the income and enforcement action is unlikely.

To research the behaviors of teenagers faced with this dilemma, I have quizzed my law school students for the past several years. I assume that law students would comprise a very law abiding segment of this group because they face the bar review committee and must demonstrate compliance with the laws and possess high moral character and fitness to practice.  They do not want to put on their bar applications that they have unfiled returns and unpaid taxes.  Because my students have a heightened interest in tax leading them to take a tax clinic course, I assume that on tax matters they demonstrate even a higher standard of tax compliance than ordinary law students.

My first discovery in quizzing this group was that students who end up in my law school class seem, by and large, to never have earned money by babysitting or cutting grass – or at least they decline to admit it in an open classroom. As a group, only a small percentage of them ever worked in self-employed positions.  This lack of self-employment as an entry into the work force may stem from generational changes from when I grew up or may result from the demographics of those who can afford to attend my law school.  I realize that my job as a paperboy from ages 12-17 no longer exists for that age group.

Never having been self-employed, these students have no worries in regard to the self-employment tax and generally demonstrate a complete lack of knowledge about the self-employment tax.

Second, among the minority of students who have held self-employed positions, the percentage of these students reporting self-employed earnings as teenagers hovered right around the percentage I expected – absolute zero. I had one student several years ago who worked for a law firm the previous summer and earned about $6,000–$7,000.  He seemed dazed as he left the class to learn that he had a $1,000 bill for self-employment tax for his summer’s work.  Being the messenger made me slightly uncomfortable in that situation.  Unlike my fictional Jane and Michael, most teenagers in America do not seem to know about their self-employment tax filing obligations.  I do not attribute the failure to pay the tax to a desire on the part of my students to cheat on their taxes but primarily due to ignorance.  I also did not note a clamor to rush to file the missing back tax returns for those coming to the realization of their little known failure to file problem.

All of this background leads to the point of this article allegedly about tax procedure – why do we have a tax imposed for the purpose of providing benefits but which does not? Do we have the expectation that the IRS would/could/should administer this law?  Why do we want to teach people as they enter the work force that they can ignore tax laws?  Does this lead to later non-compliance?  Would tax procedure be better served by laws that the tax administrator could administer and the taxpayer could see some benefit even if it is 50 years in the future?

We will argue in this column for procedures that work, laws that support them and laws that promote compliance. The requirement to pay self-employment taxes even when earnings do not contrubute to Social Scurity credits is a poorly designed law that at best benefits from a lack of understanding and likely promotes non-compliance. Most of the non-compliance in this post’s example likely results from ignorance rather than willfulness but do we want to promote non-compliance in any manner? Don’t we want to introduce our young citizens into a tax system that is rational and just? The current model does precisely the opposite.

 

 

 

Filed Under: Social Security